CRISIL Ratings for Mutual Funds

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  • 15 Sep 2023

Investing in mutual funds is an excellent way for Indian investors to grow their wealth while diversifying their portfolios. However, the vast array of mutual fund options available can be overwhelming. To make informed investment decisions, it's essential to have access to reliable information and guidance. This is where CRISIL ratings come into play.

CRISIL is one of the leading credit rating agencies in India. Established in 1987, it has gained a reputation for providing unbiased, reliable, and insightful credit ratings for various financial instruments, including mutual funds. These ratings are crucial for both seasoned and novice investors as they offer a snapshot of the mutual fund's performance and creditworthiness.

Here are the parameters that CRISIL uses to rate mutual funds:

1. Superior Return Score (SRS)

The Superior Return Score (SRS) is a pivotal parameter in CRISIL's mutual fund rating methodology. It measures a fund's returns and risks relative to other similar portfolios. CRISIL emphasizes the importance of making apples-to-apples comparisons. For instance, comparing the performance of a large-cap fund with that of a mid-cap fund wouldn't provide meaningful insights. SRS helps investors understand how well a fund has performed in its respective category.

2. Portfolio Concentration Analysis

Concentration risk arises from over-diversification, where an investor holds too many funds with similar underlying stocks, defeating the purpose of diversification. CRISIL evaluates the degree of concentration within a portfolio to assess the potential risks associated with it.

3. Mean Return & Volatility

CRISIL considers mean return and volatility for equity funds, short-term debt funds, and credit opportunities funds. Mean return represents the average daily returns based on the Net Asset Value (NAV), while volatility measures the degree of fluctuations in these returns. This analysis offers a glimpse into the historical performance and risk levels associated with the fund.

4. Quality of Assets

Asset quality is a crucial factor in determining the creditworthiness of debt funds. CRISIL assesses the likelihood of default by the issuers of debt securities held within the fund's portfolio. Higher-quality assets generally indicate lower credit risk.

5. Exposure to Sensitive Sector

For debt funds, CRISIL evaluates industry risks and assigns a fund an Industry Risk Score (IRS). This score assesses the impact of various variables on the industry and the debt repayment capacity of organizations within a specified time horizon. It helps investors gauge the fund's sensitivity to particular sectors.

6. Liquidity Analysis (LA)

Liquidity analysis measures how easily a fund can liquidate its portfolio. A lower LA score indicates higher liquidity, meaning the fund can swiftly sell its holdings. For equity funds, this score is determined by the number of days it takes to liquidate the portfolio, providing investors with insights into the fund's liquidity risk.

7. Tracking Error

Index funds are evaluated based on their tracking error, which estimates how closely the fund's performance aligns with the index it tracks. A lower tracking error is considered a positive indicator, suggesting that the fund closely mirrors its benchmark index.

CRISIL assigns ratings to mutual funds on a scale ranging from 1 to 5, with 1 being the highest and 5 the lowest. Here's what each rating signifies:

  • CRISIL Rating 1: These funds are considered the best and indicate a strong capability to provide excellent returns with minimal risk.

  • CRISIL Rating 2: These funds have a strong capability to provide good returns with moderate risk.

  • CRISIL Rating 3: These funds have an average risk-return profile.

  • CRISIL Rating 4: These funds have a below-average risk-return profile.

  • CRISIL Rating 5: These funds are considered the riskiest and have the lowest capability to provide returns.

When investing in mutual funds, consider the following steps to make the most of CRISIL ratings:

  1. Identify Your Investment Goals: Before considering CRISIL ratings, determine your investment objectives, risk tolerance, and investment horizon.

  2. Shortlist Funds: Use CRISIL ratings to shortlist funds that align with your investment goals. Focus on funds with higher ratings if you prioritize lower risk.

  3. Diversify: Diversify your portfolio by selecting funds with different CRISIL ratings. This helps spread risk and optimize returns.

  4. Monitor Regularly: Remember that CRISIL ratings are not static. They change as market conditions and fund performance evolve. Regularly review your portfolio to ensure it still meets your objectives.

To Sum Up

CRISIL ratings are a valuable resource for Indian investors looking to navigate the complex world of mutual funds. By understanding the significance of these ratings and how to use them effectively, you can make more informed investment decisions that align with your financial goals. Whether you're a conservative investor seeking stability or a risk-taker looking for growth, CRISIL ratings provide the insights you need to build a diversified and well-balanced mutual fund portfolio.

FAQs on Crisil Rating for Mutual Funds

CRISIL's long-term rating scale deals with credit risk, indicating the likelihood of a failure to meet debt servicing obligations on time. CRISIL also rates debt instruments like fully-convertible debentures, which involve non-credit risks (such as market and liquidity risks).

CRISIL rates mutual funds on a scale of 1 to 5, with CRISIL Fund Rank 1 representing the best performance (indicating "very good performance") and Rank 5 denoting the worst.

A multi-member rating team at CRISIL conducts the analysis of each credit. The team bases its analysis on information obtained from the issuer and its understanding of the business environment in which the issuer operates. They perform this analysis within the framework of clearly delineated rating criteria.

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